Will Europe now become “Great Again”?

Europe has for decades aligned its security and economic interests with America. Both regions had similar economic and rate cycles. Conversely, Europe’s relationship with China seems forever limited by concerns over low-cost competition, intellectual property issues, and, importantly, upsetting America.

In January, however, President Trump stunned the world by essentially taking an axe to the US-centric global economic, financial and trade system. He is the third President to attempt such a systemic overhaul, after similar shocks in 1971 and 1985 by Presidents Nixon and Reagan, respectively.

Shocked, investors lowered their allocation to US investments, rotating towards Europe. At the time of writing, US large capitalisation equities were down 13% from the end of 2024 while European equities had gained 5.5%, their best relative performance since 2005 (in GBP). The Euro has gained 9.5% against the US Dollar.

Some investors now look to the EU as the last bastion of the systemic global liberal trading and economic order that they knew to exist before the 21^st of January.

But is it so? Is it finally Europe’s chance to shine?

If it is, it’s not the first. When the Euro was created in 2000, the world liked the idea of a second major reserve currency. Euro global reserves rose from a base 20% (the sum of all European currency reserves held within the Eurozone) to 30%. However, the 2010-2012 Euro Crisis demolished the illusion of Germany underwriting everyone’s debts and laid bare the architectural flaws of the common currency area: no banking or fiscal union or fiscal transfers. Stability rules were often flaunted and the central bank was hesitant to intervene in a Fed-like way. The Euro became an effective “hard currency” for European countries. Were it not for one of the greatest economic gambles of our time, ECB’s Mario Draghi’s “Whatever It Takes” speech in 2012, it might not have survived.

After the Euro Crisis erupted, global Euro reserves fell to a base 20%, still second to the US Dollar (58% - 70%). Economic growth and asset valuations lagged. Since 2010, US real output grew by 102% while the Eurozone grew by 25% (in USD). US equities gained 980% (in GBP) whereas Eurozone equities gained 340%. The Dollar gained 53% vs the Euro. Many European bonds were considered risky assets as opposed to the rock-solid mighty US Treasury.

And yet, as the world turned on its head, so did the US-centric view of it.

Instead of underperforming the US, as it would in a time of crisis, European assets are now considered relatively safer than they were before. The question is: can Europe capitalise on its relative risk upgrade and become the hub of global business in a way that America now seems to repudiate?

The EU is still plagued by structural issues and features a tough regulatory environment. A few days ago, the heads of Big Pharma asked the European Commission to rethink its regulatory framework for the sector to better facilitate business.

However, as of late, the EU’s firepower has grown:

a)    Germany has abandoned its near-century-old mercantilist model, growth by running trade surpluses, and agreed to significantly increase its budget and expand its borrowing. This will restore some balance in the Eurozone economy.

b)    After the COVID-19 pandemic, debt mutualisation gained ground.

c)     France is willing to expand its nuclear umbrella to cover other nations. Talks of a Euro-army are also in place.

d)    The UK is drifting back towards its traditional European allies. While Brexit won’t be reversed, Britain and the EU improving their military and trade relationship is beneficial to both.

e)    The Eurozone now has a roadmap forward, in the form of Mr Draghi’s report. It knows it needs to improve cooperation and external competitiveness and knows what this will cost.

Second chances don’t often come along, let alone third ones. Can Europe turn this crisis into a big opportunity? The answer to that is the sort of geopolitical wild card that may define the next few decades.

* This article was originally featured in the FT Adviser on 2 May 2025.